Has the Foreclosure Era boom in small-time real estate investing peaked and begun its decline?
Will the seven million investors, both those who buy and sell properties for a living and those who are largely landlords, slowly sell off their assets as they cash their assets it to profit from rising home values?
Will the hedge funds gobble up what’s left and dominate markets where there are inventories of foreclosures for sale and favorable cap rates, leaving the fringe markets to the small guys?
The latest annual survey of investors by the National Association of Realtors, which is actually a survey of Realtors, found that investor purchases in 2012 fell slightly. Investment-home sales edged down 2.1 percent to 1.21 million in 2012 from 1.23 million in 2011, according to NAR’s 2013 Investment and Vacation Home Buyers Survey. Investment-home sales accounted for 24 percent of all home sales in 2012, down from 27 percent in 2011, marking the second highest share since 2005, NAR said.
Surveys aren’t Hard Data
By itself, this survey is no reason to panic. Investor sales soared in 2011, so a small decline doesn’t mean much. The investor market share is still near historic highs.
“With rising prices and limited inventory, notably in the low price ranges, investors are likely to step back in coming years,” said NAR Chief Economist Lawrence Yun in a statement.
Moreover, the data isn’t so great. Realtors are one step or more removed from investor purchases at auction and pre-foreclosure sales. Most Realtors represent owner-occupants, not investors, and rely on MLS data on cash sales and distress sales when responding to such surveys. However, there isn’t better data publicly available. Estimates of investor purchases that you see in the news are either surveys or reports that equate cash sales with investor purchases.
Three Reasons to Worry
Here’re three reasons why anyone counting on the real estate investment boom continuing at its current rate should be worried:
- Foreclosures are drying up and becoming significantly more expensive. New foreclosures are down 20 percent and register higher periodically only as lenders clean up their shadow inventories now that they have new processing standards. Foreclosure and REO inventories also are falling about 20 percent a year; faster in hot markets where cap rates are high and hedge funds are active.
- The first signs of single family rental/multifamily rental oversupply are here. (See Yellow Light on Single Family Rents). Whether demand will stiffen as the single family option becomes more popular is anybody’s guess but there’s certainly reason for concern in the most overbuilt markets. To some degree, demand for single family rentals is directly tied to barriers limiting homeownership, especially high lending standards and tight inventories of homes for sale. In time, these will resolve themselves. Lenders, who have been preoccupied with the refinancing boom turn to the purchase mortgage market and realize that a little relaxation of standards will be good for business and be smiled upon by people like Ben Bernanke and Fed Governor Elizabeth Duke. As for inventory, home builders are cranking overtime to fill the need. It might take a couple of years, but the crazy price bubbles in markets like Sacramento, San Jose and San Francisco will cool off. The homeownership engine is working and renter biding time in single family renters won’t have to wait more than a year or two.
- Hedge funds have the staying power that small investors lack. They’ve already made their mark in places like Phoenix and Vegas where they drove up foreclosure and REO prices so high that they drove small investors out. As foreclosure inventories dry up, this sort of cornering of the foreclosure supply will occur even faster wherever rental markets are strong, like Florida, Denver, and other resort destinations. Fifty hedge funds may not survive, but those that do will consolidate their positions as both competitors and small investors sell to them.
Small investors certainly won’t go away entirely. They are an important part of the residential real estate landscape. They were around long before the Foreclosure Era and they’ll be around long after. However, a special moment when entrepreneurialism, chutzpah, persistence and opportunity came together at the right time to save imploding real estate markets will pass away and with it the glory years of small investors who ruled the nation’s real estate economy.
Then again, I could be wrong. What do you think?
Photo: James Whitesmith